Investors who started investing in Equity markets in the last couple of years and have seen their portfolio value go up significantly, have experienced the first shock of their Equity investment. Advising them on bringing in only the long-term money (5+ years for 100% equity exposure and 4 years for 65% equity exposure through MFs), align investment to financial goals, condition them to be prepared for 20%+ market falls (2008 is a different story altogether) will face the acid test now. Investors who started working with PenguWIN for over 3 years have witnessed couple of situations like this in the past and will be able to withstand the shock relatively better.

Though the key market Indices Sensex 30 and Nifty 50, have changed only a little (courtesy the weight of giant stocks like Reliance, TCS, HDFC, HDFC Bank) Small and Midcap stocks have taken a huge beating.

So, the question that comes to everyone’s mind is should we really need to worry whenever market takes huge hits?

First and foremost, stop looking at your portfolio on a daily, weekly or monthly basis. It’s like buying a house for 1 crore to live and keeping an eye on price movements. Please remember that whether the value goes up by 10% (1.1 Crore) or falls by 10% (90 Lakhs), it is of no consequence as you are not going to sell it (at a profit or loss) and start looking for another house. Similarly, the interim portfolio values are notional numbers and do not read too much into it. Disciplined and patient investment will be adequately rewarded by markets and I have personally experienced this. Some of you may think as “how do I know if my fund/portfolio is performing well?” Well, that is the reason why we exist and you can be assured that you are in safe hands.

Well, if the next question is “how can we expect PenguWIN to keep a track on all investors portfolio?” That’s true, but I have answered this in the past and reiterate it once again. My personal portfolio is extremely complex and I have kept it that way to ensure that almost all equity funds that we prescribe finds a place. Whenever I look at my portfolio, mostly once in 2 days, I keep a track on changes that a fund has undergone like stock or sector specific bet going wrong, change in fund manager, change in fundamental attributes, change in CIOs (chief investment officer).

Market falls happen all the time during the equity investment journey. It has happened in the past, it’s happening now and will happen in future too. This is the premium that we have to pay for the superior returns that equities generate. No pain, No gain.

Markets have been positive for about 75% of the time and negative for only the rest 25%. Equity market gains are never linear (like fixed deposits and other Fixed income instruments) and gains accrue in very short periods. Investment approach varies when you directly buy and sell shares vis-a-vis Mutual Fund based approach. Booking profits and trying to re-enter at attractive price points don’t work for Mutual Funds (Fund Manager has the responsibility). It has been proven many a times, when a fund manager attempts to cut the losses, hold cash and waits in side-lines trying to predict the market upturn to re-enter, has been a poor strategy and a few popular fund managers who tried to practice this approach have been exited from the MF Industry.

It might sound a little harsh for a few (that I am already sitting on losses), but the market provides excellent opportunities like this to deploy lump-sums. A few investors have had discussions with me on this. You could do this only if you have accumulated cash that is not required for the next 5 years. Else, stick to systematic investing. The worst thing that an investor can do in a downward market is trying to sell and move out. So, please refrain from that. If you think your risk appetite is less and can’t withstand 20 to 25% losses, then once the markets are up (no one knows when though), we can discuss and try to alter the asset allocation i.e. increasing fixed income proportion and reduce equity.

Lastly, financial goal definition and tracking is extremely critical. What happens when there is a market fall in the year of your goal? We need to categorize the financial goals into negotiable and non-negotiable.

If you have a goal of trying to buy a new house in 5 years and wanted to invest for that, you start moving funds from equity to fixed income before specific time horizons and not the week or month you need the corpus for buying. We need to balance the attractive returns that equities provide vs safety and below average returns (mostly negative net of taxes and retail Inflation) that fixed income instruments provide. In the case of a new house, if you can afford to wait a little more time (negotiable goal) then we could try to leverage the equity returns better. But for a goal like daughters or sons higher education or retirement (non-negotiable), we have no leeway and some gains need to be compromised

“Stock markets almost follow Pareto Principle:20% of the efforts lead to 80% of results. In the past 18 years markets were down for 43 months (and up for 173 months) of the total time frame of 216 months i.s. 20% of the time. Fall is always faster due to negative news flows"

The crux of this article is about the volatility in asset classes, physical and financial with specific reference to Real Estate, Gold and Equity investing, more specifically Equity MFs

Investors who started investing in equity funds since 2017 and seen the value go up and up, will probably be a little impatient, experiencing the 2000+ points correction in Sensex in the recent past and the associated high level of volatility. I make sure that I tell this to all our clients (at times more than once), that Equity funds are long-term investment products and needs to be looked at only for 5+ years, more the better. There may be a few who are lucky to enter the market when it was low, make money and exited before the fall. Even these people will fail if they try to replicate it for the second time. But, accepting the reality is always difficult.

Let me take couple of my favourite examples.

Let’s assume that a person buys an apartment in Adyar/Besant Nagar area. A 1000 sqft 2 BHK (basic price of 16,000/Sq. Ft.) will set him back by 2 crores, including registration, car park, corpus fund, club fees, EB, water, sewer etc. Once he takes possession of the apartment and moves in, within a couple of months, let’s say there is a slump in the RE (Real Estate) market and basic price drops to 15,000/- per Sq. ft. The investor will feel bad as his Networth has gone down by 10 Lakhs. On the other side, if the price increases to 18,000/- sq. ft, he feels happy that he has got a good deal, saving 20 Lakhs. Whether it is a question of 10L loss or 20L gain, there will no action of purchase/sale of the house as its notional and he has to live in the house. The value matters when he moves to a different place within or outside the country and decides to sell it or when he bequeaths the property to his children and they decide to sell it.

The same holds good when people buy gold jewellery or even coins. Gold has lost about 35% of its value since 2012 (35% is the consumer price Inflation) and the current price in INR is lower than the Sep/Oct 2012 price which was Rs. 3000/- plus. Several people have asked me this question – Is it a good time to buy gold? No one has asked me if it was time to sell gold. The worst thing is if its close friends or relatives and you tell them the facts of Gold (inflation hedge, intrinsic value and so on) which may be negative at that particular time, they feel that this guy is keen to drive Goddess Lakshmi away from our house.

Though many of the investors I encounter, have significant allocation to RE and Gold, they don’t get perturbed due to changes in price while even minor changes to stock markets (going down) is something that makes them anxious as they can easily relate numbers. So, even if the investor buys a fund for 1 lakh, that turns out to 1.25L in a year, the subsequent fall to say 1.1L is apparent as the mind relates to only the 1.25L figure, forgetting that the original investment of 1L.

Equity investing is for the long term (may not be that long as in the case of RE) and our patience will be tested by the market similar to RE and Gold, more severe at times. Some are unable to digest the volatility, especially people who have invested for short term that is just 1/2/3 years, going by the healthy returns of 2017. They tend to think that if 2017 has given 30% returns, then our investment should be able to fetch atleast 24% or 12% per year, in 2 years (fair assumption from their perspective). There are others who get excited by the returns that their friends and family members have made and move huge money to equity funds (Big Bang Investing), in a matter of few days, trying to make up for opportunity loss.

Whether 2018 or 2019 turns out to be as rewarding like 2017 (I will also be delighted to see my portfolio go up further), a time horizon of more than 5 years, higher the better, will definitely reward us with good returns and will continue to be the asset class that will provide the best returns.

People who hold less than 100% equity portfolios – Balanced Funds, Equity Savings, MIP can expect stability of returns in less than 5 years, approx. 3 to 4 years

What is the basis for my confidence? Equity market growth is a reflection of how the economy (GDP) does in the country, growth of companies in revenue and profitability, increase in consumption, increase in per capita income. The scepticism that prevailed in the market for the past few quarters is attributed to some of these indicators, not in green, while the markets were scaling new peaks. However, the Dec 2017, Q3, results have been positive and analysts expect that this momentum will continue in the coming quarters. Excluding the troubled Banking and Financial Services sector, Net Profit of a sample of 2043 companies rose to a six-quarter high of 27.5%, Net Sales by 11.5% YoY. We practice what we preach and your money is in safe hands.

We will only do with your money what we do with our won – Warren Buffett

Apologies for the long silence (excluding the folks for whom it might have been a bliss) – Some investors even asked me if I had stopped writing Blogs. Income Tax Filing and GST Registration took a toll on my time – Need some excuse, right?

I have realized that starting a new habit like walking, running, swimming, meditation is easy. But, sustaining it for a long period of time is extremely difficult. I am telling this in the context of publishing blogs on a periodic basis rather than adhoc.

‘Invest cautiously through dynamic asset allocation funds’

‘Move from mid-caps to large cap’

‘Lower your return expectations’

‘Earnings continue to be muted’

‘Cash holding and arbitrage positions have increased’

‘Risk-Reward is unfavourable for Equities’

‘GDP growth takes a hit’

‘Foreign Money is chasing India’s Reform Story’

The above statements were made by key fund managers and analysts, both Indian and International, in the recent weeks. Has our reform story taken off or yet to take-off? Statements like price to earnings P/E is more than 10-year average; 1 to 15 is considered cheap, 16-20 is considered fair and greater than 20 is considered as expensive may not be relevant in the current context. Currently Nifty and Sensex are trading at close to 24 P/E. I would tend to argue that there are major changes to the investment pattern which will change the contour of equity investments and following are some of the points why I think so.

Retail Investor participation in markets through MFs and ULIPs is at all time high with inflows increasing month over month. Equity MFs had an all-time high net-inflow of Rs. 21,875 Crores in Aug 2017. How was it before? Equity MFs had an all-time high net-inflow of Rs. 14,480 Crores in July 2017. This highlights the appetite of Indian Retail Investors which was not the case earlier.

Other than MF Equity route, inflows are high from sources like National Pension Scheme, Provident Fund, ULIPs.

The reason attributed to this heavy inflow is not that Investors have started embracing equity but also due to stagnant Real Estate Sector, Gold still struggling to cross 2012 levels and lowering of Bank/Post Office/Company Fixed deposit rates.

Instead of yearly dividend payments which was the norm until a few years ago, Quarterly and Monthly dividends in Equity Funds are being paid to attract gullible investors.

Some Wealth Management firms and independent practitioners, enticed by the volume and immediate benefits, invest huge lump-sums of their clients, running into crores, even in the current market.

The argument of average 10-year Price Earning is something that I don’t subscribe as there will be demand-supply mismatches which inflates the PE of a good stocks with earnings visibility

So, as sensible investors, what is that we can do in this frenzied Bull Run:

Investors who embark on direct equity in this period need to know that, during bull runs, even the worst of stocks do well. Warren Buffet, the Oracle of Omaha and considered as the god of equity investing quoted ‘Only when the tide goes out do you discover who’s been swimming naked’.

Do not go for Lump-Sum investments and invest through systematic plans – SIP and STP – Almost all Chief Investment Officers and Fund Managers of Fund houses are unanimous with this message.

Medium and Small Company stocks have become overvalued and the hit will be heavier during correction. Advice is to stick with Large Company Stocks or move allocation from Small and Mid to Large. This is also a unanimous message

The Equity markets would have changed the asset allocation pattern – skewed towards Equity than Debt and this needs to be rebalanced.

Cashing out of Equity, especially MFs, is not a good idea as it is extremely difficult to predict when the correction will happen and when the market will go back to the original high. I remember atleast 3 popular fund houses, that took cash calls during the 2008-9 global crisis and for a short period those funds were doing better as they contained losses. But the celebration for those funds was short lived as the markets turned around sharply, not allowing the funds to re-deploy the cash. Some of these funds are still languishing.

Even if there is a 10 to 20% correction, the macro factors for India is good which will life the markets – Inflation down, GST Implementation, Current Account and Fiscal deficit, Government gaining due to low Crude Prices – The only reason to be cautious is if we get another shock like Demon. or Beef ban or unrest with neighbours